Finance regulator concerned over unarranged overdraft fees

The financial regulator said fundamental changes to the way unarranged overdrafts are provided may be necessary as part of its review into high-cost credit.

The Financial Conduct Authority (FCA) has today published the findings of its payday loan price cap review, assessing its effectiveness.

It found that regulation of the high-cost short-term credit, commonly known as payday lending, has delivered “substantial benefits to consumers”.

To date, 760,000 borrowers in the market have made a total saving of £150m a year and firms are much less likely to lend to those who are unable to afford repayments. Further, the FCA said debt charities are also seeing fewer clients with debt issues.

As a result, the existing loan price cap will remain in place, with a review due in 2020.

Introduced in January 2015, the ‘price cap’ rules ensure a limit to the amount of fees and interest a customer would pay, in particular if they were unable to meet repayments. The rules state that customers can’t be charged more than 100% of the original loan value in fees and interest; there’s a £15 cap on default fees; and an initial cap of 0.8% interest per day cannot be exceeded.

However, as part of the FCA’s review, it has raised concerns about other forms of high-cost credit, particularly unarranged overdraft fees. It said charges for unarranged overdrafts are often high after taking into account the risks to lenders, and can be hard for consumers to understand.

It’s also identified concerns in the rent-to-own, home-collected credit and catalogue credit sectors and it will consult on taking action to address these in spring 2018.

Andrew Bailey, chief executive of the FCA, said: “High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers. We are pleased to see clear evidence of improvement in the payday lending market after a period when firms’ treatment of customers and their business models were often unacceptable.

“However, there is more that we can do. In particular, the nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option.”

Gareth Shaw, Which? money expert, said: “Significant concerns about unarranged overdraft charges are not new, Which? previously found these fees could cost considerably more than payday loan charges. The FCA’s own research now backs this up, so it must act swiftly to crack down on these exorbitant fees and to restrict unarranged overdraft charges to the same level as for arranged overdrafts, as further delay will only cost consumers.”